LONDON, Jan 9 (Reuters) – U.S. natural gas prices have fallen sharply as the unusual cold weather of late November and early December has given way to warmer-than-normal temperatures in the last four weeks.

Futures prices for gas delivered at Henry Hub in February 2019 have fallen below $3 per million British thermal units from a peak of almost $4.80 in the middle of November.

The exceptional rally in gas prices during the late summer and early autumn has unwound, leaving gas prices back at the low level that has prevailed for the last three years (tmsnrt.rs/2RIgtvy).

Cumulative heating demand for the 2018/19 heating season was around 6 percent higher than the long-run average through Dec. 12, according to the U.S. government Climate Prediction Center.

But the sustained period of cold in late autumn and early winter has been replaced by an extended period of mild weather and cumulative heating demand has now dropped 4 percent below normal (“Degree days statistics”, CPC, Jan. 8).

Government forecasts show average or above-average temperatures expected across most of the major population centres of the United States for much of the next three months.

FUEL SWITCHING

So far this winter, gas stocks have fallen much less for any given level of heating demand than in the previous heating seasons, which has also helped rebalance the market.

Surging gas prices have encouraged electricity generators to run gas-fired units for fewer hours in the fourth quarter and turn to coal-fired units instead, cutting gas consumption and making scarce stocks go further.

Working gas stocks in underground storage were 726 billion cubic feet (20 percent) below the previous five-year average in mid-December, according to data from the U.S. Energy Information Administration.

By the end of the year, however, the deficit had eased to just 561 billion cubic feet (14 percent) due to warmer weather and a reduction in hours by gas-fired generators (“Weekly natural gas storage report”, EIA, Jan. 4).

HEDGE FUNDS

The rise and fall in gas prices has been accentuated by the accumulation and subsequent liquidation of hedge fund positions since the end of July and especially since the end of September.

Hedge fund managers correctly anticipated a shortage of gas this winter and the likelihood price spikes would be needed to eke out the low stocks left at the end of the refill season.

Fund managers were net buyers of futures and options equivalent to 2,229 billion cubic feet of gas between late July and mid-November, according to position data from the U.S. Commodity Futures Trading Commission.

By the middle of November, fund managers held almost 7 bullish long positions for every one bearish short positions, the most biggest bullish imbalance since at least 2010.

Funds probably continued to liquidate bullish positions in the last two weeks of the year – though there is no way to tell yet because publication of updated numbers has been delayed by the U.S. government shutdown.

Hedge fund accumulation of bullish positions likely accelerated and exaggerated the rise in gas prices early in the fourth quarter, but it also enforced the necessary conservation of gas stocks and avoided worse shortages.

As the seasonal gas deficit has been reduced and those bullish positions have unwound, selling pressure has intensified the subsequent price plunge.

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